When Bankruptcy Is a Good Thing

Three components of this new law.

  The story, unfortunately, is a common one: Joe owns a great restaurant, the Mediterranean menu is terrific, the service is wonderful, and the place always seems packed.  But, Joe has taken out a lot of personal loans under very disadvantageous terms in order to set up the business, he’s had higher labor costs than he anticipated, and cash flow is almost non-existent.  The next thing you know, this wonderful place you patronized every week for years is shuttered and lost to you and your community. Joe is now trying to pay off his debt by working two jobs. The fact is that very viable businesses, with great potential, often fail because of too much debt, sometimes assumed by their owners years before. Such businesses should not have to fold.  They should have the option to reorganize, so that they can get back on their feet. Until recently, the cost and burdensome requirements of a reorganization bankruptcy, commonly called a Chapter 11 bankruptcy, made it not much of an option for many small businesses.  However, there is now a new bankruptcy law available that makes such a reorganization possible. The Small Business Reorganization Act of 2019 (the “Act “) took effect on February 19, 2020.  It makes a successful Chapter 11 reorganization more of a possibility for small businesses which could be profitable if only they could reduce their debts.  Originally, a business could only take advantage of the Act if it had no more than $2,725,625 of debt, but under the recently enacted CARES Act, for at least one year, it will be available to businesses which have up to $7,500,000 of debt.  The Act is also available to individuals whose debts primarily arose in connection with commercial or business activities. Some of the features of this new law include:

1. Streamlined Procedures

The main purpose of the Act is to make the Chapter 11 process more efficient and less burdensome for small businesses.  For example, unlike traditional Chapter 11 cases, where creditors may have the opportunity to propose a plan of reorganization that is unfavorable to the company in bankruptcy, under the Act, only the company has the right to file such a plan.  There is also no longer the requirement for the business to file a disclosure statement, which can be a very time consuming and expensive process.

2. Fewer Costs

Businesses engaged in reorganizations under the Act should incur fewer costs.  The amount of legal work involved should be less than in a traditional Chapter 11 case, resulting in fewer legal fees.  The process also takes less time than a traditional Chapter 11 case.  In most cases, there will be no creditors’ committee in a case filed under the Act, which is an additional savings.  Furthermore, there are no quarterly U.S. Trustee fees involved, another big savings.

3. Easier to Confirm a Plan

Finally, it is no longer necessary that a majority of a business’s creditors have to vote in favor of a reorganization plan.  In a traditional Chapter 11 case, a certain number of creditors must vote in favor of a plan in order for that plan to be approved by the judge.  Under the Act, although creditors still must vote, the plan can be approved even if no creditors vote to accept the plan.  In other words, as long as a company follows the rules of bankruptcy, the plan will be confirmed.  Reducing the power of creditors to be able to stymie a business’s efforts to confirm a plan of reorganization is probably one of the most important reforms under the Act. The Act should change the landscape of Chapter 11 bankruptcy for the better.  Businesses which could not previously take advantage of the powerful tools of Chapter 11, now have that option.  The leverage traditionally enjoyed by creditors in Chapter 11 bankruptcy has been reduced so that small businesses can make reasonable plans for reorganization.  It is estimated that greater than half of all Chapter 11 debtors will now be able to take advantage of the Act, especially with the debt limitation increased under the CARES Act. Liquidation is no longer the only option for a struggling business. The Act could provide, literally, a new lease on life for people like Joe.  Bankruptcy doesn’t have to be a bad word. And Joe’s community need not be deprived of his excellent seafood platter. Related content:

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